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March 30, 2020

COVID-19 UPDATE: Loan Programs for Small and Medium-Sized Businesses

Several of you have reached out for guidance on navigating the numerous government economic relief programs that have been announced, specifically those included under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed by the President on Friday. While general eligibility requirements are included in the law, additional guidance will be forthcoming over the next days and weeks. We provide a few points below.

U.S. Small Business Administration Loans

Payroll Protection. Loans under the Payroll Protection Loan Program (for businesses with 500 or fewer employees) created under the CARES Act will be processed by banks and other lending institutions that are qualified SBA lenders. These lenders are working on developing their procedures to meet the expected demand, while awaiting regulations from the SBA that will provide guidance in interpreting and implementing the broad provisions of the CARES Act.

Many details will need to be worked out. Some of these details will affect the calculation of the amount that may be borrowed, including: (a) establishing the exact 12-month measuring period to be used in calculating average monthly payroll costs; and (b) clarifying whether the compensation cost limit applicable to employees earning over $100,000 also applies to health care and other benefits paid with respect to those employees. Other details to be worked out will affect the permitted uses of Payroll Protection Loans and the calculation of the portion of the Payroll Protection Loans that are subject to forgiveness.

So, while the general outlines of the program are set, there is still much devil in the details. We are monitoring these developments closely and will update you as information becomes available. In the meantime, we have learned that many lenders are either prioritizing or restricting the processing of loans to their existing customer base.

Should you encounter any difficulty in identifying a banking contact to assist you with this program, please contact us. We have been in discussions with several banks and can assist you in identifying an appropriate contact.

Disaster Relief Loans. All counties in Illinois have been declared a disaster due to COVID-19. Low-interest loans issued by SBA-approved lenders of up to $2 million are available to qualifying borrowers (small businesses and non-profits) for working capital needs. The loans may be used to pay fixed debts, payroll, account payable and other bills that can’t be paid due to the pandemic. See HERE.

Bank Deferrals. The CARES Act also states that, it is the “sense of Congress” that the SBA should encourage lenders to provide “payment deferments… and to extend the maturity of covered loans, so as to avoid balloon payments… during the period of the national emergency declared by the President under the National Emergencies Act with respect to the Coronavirus Disease 2019 (COVID–19).”

In addition to SBA loans, several banks have developed procedures on deferrals for other loans. We encourage you to check with your particular bank for their program, and you may also wish to work with your creditors to determine whether relief is available to you for other debts.

Loan Facilities for Medium-Sized Businesses

As we explained in our updates last week, the CARES Act provides around $529 billion in loans, loan guarantees and other investments to distressed sectors of the economy, including around $60 billion for the aviation sector. Within 10 days of the law’s enactment, the Secretary of Treasury is required to publish the application and minimum requirements for these “distressed industry” loans.

Notably, a significant portion of the relief package—$454 billion—is not restricted to specific industries. However, the legislation does instruct the Secretary of the Treasury to endeavor to use at least some of these funds to implement programs that provide financing to banks and other lenders that make direct loans to eligible businesses and nonprofit organizations >strong>with between 500 and 10,000 employees

. These loans are subject to an annualized interest rate that is not higher than 2 percent per annum. Also, for at least the first 6 months of such loans, no principal or interest is due. As with the other “distressed industry” loans, several restrictions on executive compensation, dividends and stock buybacks apply. The Federal Reserve and/or the U.S. Treasury will be issuing further guidance on these loans in the coming days and weeks.

We will continue to send periodic updates on topics that may be helpful to your businesses. If you have a particular issue that you’d like us to address, please let us know.

Feel free to contact us if you have any questions.

Gery Chico, Jon Leach, and Alpita Shah
Chico & Nunes, P.C.

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